Will Student Loan Law Pass the Test?

A bill cleared by Congress earlier this year to ensure student loan availability in the short term was widely accepted as just enough to avert a major crisis. But with financial markets still cool and the mechanisms of the new and complicated program yet to be tested, any hiccups in August or September-the height of loan season-could spur further congressional action.

Even if things go smoothly, some observers say, Congress will need to do more to make sure the federal loan program remains functional beyond this academic year. "We're praying it works, but everything, all the good news that we have right now could be reversed in part as we get through August," said Larry Zaglaniczny, director for congressional relations at the National Association of Student Financial Aid Administrators.

The law (H.R. 5715-P.L. 110-227), which Congress quickly cleared to ensure students continue to receive loans through the federally-backed program, addressed frozen markets and lower lender profits by giving the Education Department the authority to purchase existing loans through the end of this academic year. The assumption was that lenders would then have cash to originate more loans. The law did not, according to department attorneys, give the department the power to advance funding to lenders. That means participating lenders must generate up-front cash on their own. As a result, some lenders have been able to jump in successfully while others are having difficulty.

But non-bank lenders, such as nonprofit and state-based entities, are having a hard time coming up with the "bridge funding" needed to make loans to sell the department. "Many in Congress thought this would be enough. But it turns out the bridge funding is a major impediment...they just don't have the funds," said Mark Kantrowitz of FinAid.org, a website about student lending and financial aid. According to his calculations, 103 lenders have totally suspended participation in the federally backed program. The key question, he says, is whether the remaining lenders will be able to fill the gaps created by those exiting and whether the Education Department will get them the money quickly enough for them to continue making promised loans.

Already, Reps. Barney Frank (D-MA) and Paul E. Kanjorski (D-PA) have plans to investigate the overall market situation and make sure lenders can keep giving students much-needed loans for school.